The Bank of England is expected to unveil the biggest interest rate hike in more than three decades next week, even as the country braces for a potentially deep recession.
Most economists believe that the key Monetary Policy Committee (MPC) will increase the base rate by 0.75 percentage points to 3% at the November 3 meeting.
It would be the eighth consecutive jump in interest rates by the central bank and the largest increase since 1989.
This decision will aim to tame the growing levels of inflationwhich exceeds 10 percent.
The meeting comes amid warnings that spending cuts and tax increases under new Prime Minister Rishi Sunak could lead to a deeper and longer lasting recession.
After a period of turmoil in Britain, caused by the economic plans of former Prime Minister Liz Truss, which sparked a bond market routthe BoE’s double monetary tightening could seem at odds with its current forecast that the economy will contract until 2024.
But inflation is still likely to be well above the Bank’s 2% target in 2023 and with some of Ms Truss’ costly aid for households and businesses still in place, the only way is increase borrowing costs.
“As things stand, my best guess is that inflationary pressures will require a stronger response than perhaps we thought in August,” the BoE governor said. Andrew Bailey said October 15.
Some of Mr Bailey’s inflation concerns eased two days after his speech when new finance minister Jeremy Hunt reversed nearly all of Ms Truss’ planned tax cuts and shortened his capping program energy to increase income at six months instead of two years.
Oxford Economics chief economist Andrew Goodwin said the MPC still faces a difficult balancing act.
“Many economic indicators have weakened since the last committee meeting in September, but the labor market has remained tight and wage growth is strong,” Goodwin said.
Earlier this month, markets had predicted interest rate hikes could reach a full percentage point, but sentiment cooled somewhat after the chancellor and prime minister change and bond purchases from the Bank of England have lowered the cost of borrowing.
Markets also saw less appetite for big hikes globally, with the Bank of Canada raising its interest rate by 0.5 percentage points, below the 0.75 percentage point hike. percentage that had been widely expected.
Deutsche Bank analysts said they expect the Bank of England to opt for a 0.75 percentage point hike with a split vote.
Company experts said they expect the latest forecast from the Bank of England, which will also be revealed on Thursday, to show that “the economic outlook has deteriorated further”.
They said: “Conditioned by market prices, the UK economy is likely to fall into a deeper and more prolonged recession.”
Investors say there is about a 90% chance of a 75 basis point hike in the Bank Rate to 3% on November 3.
On Friday, ING analysts were forecasting a lower rise of 50 basis points.
The image further on is obscured by the delay the plans of Mr. Sunak and Mr. Hunt to consolidate public finances.
Earlier this week it was revealed that an upcoming financial statement scheduled for October 31 has been postponed until November 17.
The planned economic statement define next steps in the midst of the cost of living crisis.
The government faces difficult decisions. British media reported that they were considering £50 billion in tax increases and spending cuts, more than the hole in the budget estimates.
Interest rate futures show investors are far less concerned about inflation than they were just a few weeks ago, with the Bank Rate expected to peak at around 4.75% in 2023, compared to more than 6% before the sudden end of “Trussonomics”.
At the MPC meeting, the bank will confirm its longer-term inflation expectations, which should show the cost of living to be well above its 2% target next year.
James Smith, developed markets analyst at ING, also made a bearish forecast for the bank’s latest economic outlook.
“The new set of expected forecasts, which are essentially based on market interest rate expectations, are expected to be dismal – showing both a deep recession and inflation below the medium-term target,” he said. he declared.
“This should be interpreted as a not-so-subtle hint that market prices are inconsistent with achieving its inflation target.”
The bank’s plan to start selling some of the bonds it has bought since 2009 to support the economy will also ease some of the pressure to raise rates.
Deutsche Bank said the £40 billion in sales expected over the next year was equivalent to about 25 basis points in rate hikes.
But Mr Goodwin of Oxford Economics warned of the potential dangers of the plan.
“There is no urgent reason to initiate quantitative tightening and bond sales risk triggering further turbulence in the gilt market,” he said.
Updated: October 28, 2022, 3:11 p.m.